Inflation and the Post-Pandemic Retirement Spend-Down Plan

by Lawrence Tundidor

According to the U.S. Census Bureau, more than 10,000 individuals will retire in the United States every day between now and the end of the decade. As the economy recovers from the pandemic and the country has begun to fully reopen, more Americans than ever are looking forward to their retirement day and ability to start a new chapter in their lives. This raises the thought-provoking question, have you developed an inflation-protected retirement spend-down plan for a lifestyle that could last 30 years or more?

Given the recent inflation spike, a recent Allianz study found that two-thirds of retirees do not feel confident about maintaining financial security and buying power throughout their remaining lifetime. These concerns and feelings of uneasiness stress the importance of developing/utilizing a solid spend-down plan for retirement. Therefore, Ideal-LIVING spoke with Lawrence S. Tundidor,

AIF®, AAMS®, AWMA® of the Tundidor Wealth & Investment Group to help clarify questions that pre-retirees and retirees may have regarding the effects of inflation on the development of a spend-down plan.

A plan is based on one’s specific situation. Each individual has a different vision of their ideal retirement, which results in different spending needs and wants. In addition, there are various saving vehicles that one may have utilized, such as a pension, 401K/403b, personal savings, or real estate.

In starting a plan, it’s pertinent to consider guaranteed income first, such as social security, pension, or annuity income, to help aid in determining the income gap that may be present. Income gap analysis is based on one’s needs and wants. In general, needs include housing, food, and medical expenses, while wants are specific to an individual but may include yearly vacations, a new car, or a second home. Once sources of guaranteed income are taken into consideration, and the income gap is established, the focus becomes how to draw down the remaining assets to cover the income gap initially and in the future when accounting for higher inflation and rising health care costs.

When considering inflation and rising cost, many individuals with guaranteed income sources, such as a pension, do not receive a cost-of-living-adjustment. This becomes a long-term issue, since an individual’s gap can become larger because his or her income is not increasing to account for higher living costs.

For example, an individual with a $4,000-a-month pension at age 60 has approximately the equivalent of $2,000 a month of purchasing power at age 80. A spend-down plan and income gap is specific to the individual, which stresses the fact that obtaining qualified help from a financial professional or firm that focuses on income strategies for retirement is pertinent. In contrast, some individuals may decide to take on the challenge themselves.

One way to mitigate the effects of inflation on your retirement is to plan where your money will come from instead of putting it all into one pot. In retirement, you should consider having “Retirement Buckets”: longterm, mid-term, and short-term investments to help protect you from market fluctuations while maximizing your income potential. More conservative investments go in short term, moderate investments for mid-term, and more aggressive in long-term. Picking and choosing investments to liquidate on a monthly basis can be stressful, and most advisors show you how and where to save but not how to create an income stream from your investment assets.

When drawing income directly from a 401k, the plan provider will typically sell shares or “units” to send you a monthly amount you requested. The issue with this strategy is that you are indiscriminately selling shares in an up or down market regardless of price. In a down market, you are selling shares at a lower price and therefore cannot allow time for those shares to recover, essentially “burning the candle on both ends.” Consider investments that provide a dividend or yield that allow you to draw income without selling shares.

Another way that many Americans have chosen to potentially minimize the effects of higher inflation on their retirement is to invest more aggressively. This option seems counterintuitive, since most individuals attempt to become more conservative as risk aversion to market downturns becomes a more pressing issue. Due to the current lingering low interest rate environment where savings accounts, short term bonds, and CDs are paying below inflation rates, as well as the interest rate risk associated with higher yielding longer-term bonds, many have decided to invest higher amounts in riskier assets in order to achieve higher yields by potentially exposing themselves to greater downside in market cycles. Developing a plan that mitigates risk to one’s principal while generating sustainable income is more important now than it has been in the past.

Many different approaches can be utilized when implementing an inflation-protected retirement spenddown plan. It’s important to remember that the plan is based on the individual and their short/long term goals, and how much monthly income they need in retirement.

Post-pandemic retirement planning is proving to be very different, so take the time to explore your options well in advance of your retirement age. We encourage you to sit down with an objective independent financial advisor who puts your best interests first and helps you compose a written personalized and holistic financial strategy with the goals of protecting your retirement investments and securing the next chapter of your financial future.

To learn more, please attend Lawrence’s seminars held at the Whippany, New Jersey, and Tysons Corner, Virginia, Ideal-Living Expos in September. In the meantime, if you have any questions, feel free to contact Lawrence at LawrenceT@CeteraWealth.com

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